Negotiate the Basket
In the world of mergers and acquisitions, a “basket” is the amount of damages that must be suffered by the acquiring entity before it can recover from the seller under the indemnity provisions of the acquisition agreement.
Three main issues arise in drafting the basket clause:
(1) Size–Typical basket amounts are in the 1 to 2 percent range of the purchase price, but amounts up to 5 percent are not out of the ordinary.
(2) Which party absorbs the amount below the basket amount? (For example, if a basket amount is $300,000 and the damage is $500,000, is the seller responsible for the entire claim or just the amount in excess of the basket, i.e., $200,000?) Typically the acquiring entity absorbs the amount up to the basket amount.
(3) Are individual claims aggregated to satisfy the basket amount? (For example, let’s say the basket amount is again $300,000, but in this case four different claims add up to the $500,000 amount. Is the basket amount satisfied?) If you are the seller, you do not want any small claims aggregated and quite the opposite if you are the purchaser.
All of these issues should be contemplated, negotiated and then drafted into your acquisition agreement’s indemnity clause.